Chipmakers Ambarella's (NASDAQ:AMBA) and AMD's (NASDAQ:AMD) fortunes diverged sharply this year. Ambarella's stock has tumbled over 25%, due to concerns about its slowing sales growth and its ability to keep up with technological shifts, while AMD rallied nearly 60% as investors cheered its comeback against Intel (NASDAQ:INTC).
I previously compared these two stocks last October and this past March, and both times I concluded that AMD was a better pick than Ambarella. Let's take a fresh look at both stocks to see if that verdict still holds true.
How do Ambarella and AMD make money?
Ambarella makes image application processors for action cameras, dash cameras, security cameras, drones, and other devices. It also produces computer vision chips for autonomous vehicles via its VisLab subsidiary.
Ambarella's top customers include top action camera maker GoPro (NASDAQ:GPRO), drone leader DJI Innovations, and Hikvision, the top security camera maker in the world. However, all three companies recently started installing non-Ambarella SoCs in their products. GoPro started using Japanese chipmaker Socionext's custom SoCs, while DJI and Hikvision both started using chips from Intel's computer vision chipmaker Movidius.
AMD generates its revenue from two main businesses: its Computing and Graphics unit, which produces its x86 CPUs and discrete GPUs, and its EESC (Enterprise, Embedded, and Semi-Custom) unit, which sells custom chips like APUs for gaming consoles like the PS4 and Xbox One.
AMD controlled 15% of the desktop CPU market and 3% of the laptop CPU market during the second quarter, according to Susquehanna analyst Christopher Rolland. Its rival Intel controlled the rest of the market. Research firm JPR reports that AMD held 35% of the discrete GPU market during the first quarter, as NVIDIA (NASDAQ:NVDA) captured the remaining 65%.
Which company is growing faster?
Ambarella has posted double-digit revenue declines for three straight quarters due to ongoing problems at GoPro, the loss of customers to rivals like Movidius, and soft demand for VR cameras and drones. Ambarella expects that pain to continue, with an 11%-16% decline for the current quarter -- which was well below the 5% drop analysts had expected. Wall Street expects Ambarella's revenue to slide 10% for the full year.
Ambarella's non-GAAP gross margin also declined 250 basis points annually to 61.8% last quarter due to a higher mix of lower-margin revenues from China's security cam market and a drop in higher-margin drone revenues. That decline, exacerbated by rising operating expenses, caused its net income to plummet 71% to $4.5 million. Analysts expect Ambarella's earnings to drop 59% for the year.
AMD has posted double-digit revenue growth for seven straight quarters, fueled by the simultaneous growth of its CPU, GPU, and EESC businesses. AMD kept pace with NVIDIA with new Radeon GPUs, undercut Intel with its new Ryzen and EPYC CPUs, and updated Xbox One and PS4 consoles boosted demand for its custom APUs.
AMD expects its revenue to rise 37%-45% for the current quarter, compared to the consensus estimate for 30% growth. Wall Street expects AMD's revenue to rise 26% for the full year.
AMD's non-GAAP gross margin rose 400 basis points annually to 36% last quarter, fueled by strong sales of its Radeon, Ryzen, and EPYC chips. As a result, its non-GAAP earnings surged from $2 million in the prior year quarter to $121 million. It also posted a GAAP profit of $81 million, compared to a loss of $33 million a year earlier. Analysts expect AMD's non-GAAP earnings to jump another 165% this year.
What challenges do Ambarella and AMD face?
Ambarella repeatedly claims that its new CV-series computer vision chips will get its growth back on track. But investors should take that claim with a grain of salt, since Movidius' new computer vision chipsets already lured away two of Ambarella's top customers.
Moreover, Intel can bundle Movidius chips with its Atom automotive CPUs and Mobileye ADAS (advanced driver-assistance systems) for automakers. Ambarella, which lacks those bundling capabilities, could be shut out of the market.
AMD remains vulnerable to Intel and NVIDIA. Both chipmakers are already selling cheaper chips -- like Intel's i3-8100 ($120) and NVIDIA's GTX 1050 ($140) -- which target AMD's core budget market. Newer chips could abruptly throttle AMD's growth.
The valuations and verdict
Ambarella trades at about 35 times forward earnings versus AMD's forward P/E of 27. That premium isn't justified by Ambarella's growth at all, and seems solely supported by its computer vision dreams. AMD's forward multiple seems more reasonable relative to its growth potential.
Therefore, my verdict remains the same: AMD is a better buy than Ambarella. Its new chips should widen its moat against Intel and NVIDIA, and its margins are expanding. Ambarella, however, must contend with a shrinking customer base as it falls behind better-funded rivals like Movidius.